Lake Shore Bancorp, Inc. Reports Results for the Fourth Quarter and Fiscal Year 2008 and Announces Withdrawal of TARP Application

Business Wire, Feb 13, 2009

DUNKIRK, N.Y. -- Lake Shore Bancorp, Inc. (the "Company") (NASDAQ Global Market: LSBK), the holding company for Lake Shore Savings Bank (the "Bank"), reported net income of $871,000, or $0.15 per diluted share, for the quarter ended December 31, 2008, which represents a 29.0% increase compared to net income of $675,000, or $0.10 per diluted share, for the quarter ended December 31, 2007.

"We are very pleased with earnings in the fourth quarter, but we are cautious about the future. We experienced record loan and deposit growth in 2008 by continuing to increase our market share in Erie County. The opening of the Kenmore-Tonawanda office on Delaware Avenue in December 2008 was a great success with deposits reaching over $11.0 million", stated David C. Mancuso, President and Chief Executive Officer. "In general, community banks saw deposits increase as the economic conditions started to impact the larger, mega-banks. As we look to 2009, we continue to be concerned about the current economic conditions. If mortgage rates continue to drop, we will see increased pressure on net interest income. While lower mortgage rates are a benefit to the consumer, the lower rates will cause pressure on bank earnings in 2009. In 2009, our goal will be to increase loan growth by providing residential mortgage and small business loans in the market areas that we serve."

The Company also announced that its board of directors approved the withdrawal of the Company's application for the Treasury Department's Capital Purchase Program (CPP), which is part of the broader Troubled Asset Relief Program (TARP). Mr. Mancuso stated that "this decision was made based on the Company's strong capital position and its ability to continue making loans in its market areas. Furthermore, the initial inclination of the Board and senior management was to apply for the funds by the November 2008 deadline in anticipation of reviewing the Treasury Department's term sheet for mutual holding companies, prior to officially making a decision on whether or not to accept the funds. The term sheet for mutual holding companies has yet to be finalized by the Treasury Department, and after careful consideration, it was decided that the additional funds were not needed due to the bank's current capital position."

Fourth Quarter 2008 Results Compared to Same Period in 2007

Net interest income was $3.2 million and $2.6 million for the quarter ended December 31, 2008 and December 31, 2007, respectively. Net interest spread and net interest margin were 3.09% and 3.49%, respectively, for the quarter ended December 31, 2008 compared to 2.56% and 3.08%, respectively, for the quarter ended December 31, 2007. Loan interest income increased $338,000 to $4.0 million for the quarter ended December 31, 2008 compared to the same period in 2007. Loan interest income was positively impacted by a $20.0 million, or 9.2%, increase in the average balance of loans receivable, net from $217.6 million as of December 31, 2007 to $237.6 million as of December 31, 2008. During the fourth quarter of 2008, the fair value of our interest rate floor product increased $340,000 compared to an increase of $224,000 in the fourth quarter of 2007. The increase in fair value was recorded in loan interest income. In addition, $100,000 in interest income was received on the interest rate floor product during the quarter ended December 31, 2008, a 100% increase over the quarter ended December 31, 2007, as the prime rate was below the contractual rate in the floor agreement during the 2008 quarter which triggered payment. Interest expense on deposits decreased by $100,000, or 5.9%, for the quarter ended December 31, 2008 compared to the quarter ended December 31, 2007, primarily due to lower interest rates being offered on deposit products during the 2008 period which was partially offset by a 21.8% increase in deposit balances since December 31, 2007. Interest expense on short-term borrowings and long-term debt decreased by $131,000, or 20.0%, for the quarter ended December 31, 2008 compared to the quarter ended December 31, 2007, primarily due to a $4.5 million decrease in borrowings since December 31, 2007 and a 0.64% decrease in the weighted average interest rate paid on borrowings.

Provision for loan losses during the quarter ended December 31, 2008 was $91,000 compared to $60,000 for the quarter ended December 31, 2007. The increase in the provision for loan losses was primarily due to an increase in non-performing loans, offset by a reduction in provision amounts for our residential loan portfolio. Specifically, four commercial loans to one borrower were considered to be "impaired" as of December 31, 2008. These loans, with a collective balance of $2.6 million, were made to support operations and building acquisition for a start-up franchise restaurant business. The loans were more than 60 days past due and on non-accrual status as of December 31, 2008. As of December 31, 2008, the Company was working with the borrower to restructure the loans. During the 2008 quarter an adjustment to the provision for loan losses on the Company's residential mortgage loan portfolio was made. It was determined that an adjustment to lower the provision was necessary on this portion of the loan portfolio based on collateral values for the residential mortgage loans, the Company's historical losses and the market value of homes in Western New York, where the majority of our residential mortgages are located. At December 31, 2008 our non-performing loans made up 0.69% of our total loan portfolio, which was a decrease compared to 0.75% as of December 31, 2007. At December 31, 2008 and 2007, our allowance for loan losses equaled 89.4% and 74.6% of non-performing loans, respectively. We are continuing to monitor our loan portfolio, and given current economic conditions we will modify the provision as necessary in subsequent quarters.